China Wants Legally-Binding Climate Agreement, But Has Many Demands

The degradation of the environment is China's biggest challenge. Remember March of this year (2011), when the Chinese government released its 12th Five-Year Plan it emphasised sustainable economic growth and came up with policy objectives and quantitative targets that foster green technology. It also announced that there must be a 16 percent cut in energy consumption per unit of GDP by 2015, see here. 600 billion dollar is projected to, among other sectors green energy, environmental protection and innovation, read here. Great, so the Chinese government finally seems to take the environment serious? Not so fast. Let us see what China's role will be within the Conference of the Parties (COP 17). This United Nations Framework Convention on Climate Change is taking place from 28 November to 9 December 2011 in Durban, South Africa, to discuss how to stop global warming. 

China might be willing to sign a climate deal...
Do not hold your breath.
On second thought, 
you'd better hold your breath.
Photo: Danny Friedmann

The economic troubles in Europe and the U.S. are probably not conducive to get an extension of the non-binding Kyoto commitments. India and South Africa are repeating the argument that developing countries are exempt from obligations to cut carbon dioxide, because they cannot afford to jeopardise economic growth for more environmentally responsible production. However, China seems open for a legally binding agreement for the period starting in 2020, according Marlow Hood's Agence France Presse article, under certain conditions: 

- China wants the Kyoto commitments to become enforceable.

- European Union and "other countries" sign on to a new round of enforceable pledges under Kyoto.

- Countries need to invest in a 30 billion U.S. dollar "Fast start" climate fund for poorer countries for the period 2010-2012. 

- Countries need to invest in a 100 billion U.S. dollar per year Green Climate Fund by 2020.

- The process started during the 2009 Copenhagen summit and continued in Cancun, Mexico must move forward. So, deals must be made about technology transfer, adaptation, helping vulnerable nations cope with impacts, and new rules for verifying that carbon-cutting promises are kept.

- The effects of China's carbon-cutting measures can be reviewed as of 2013. And to keep some diplomatic wiggle room China expects that "established principles in which historical responsibility for creating the problem of climate change, and the respective capacity of countries to fight it, are respected."

That is quite a wish list. And making your commitment or obligation contingent on the fulfillment of all these conditions is a recipe for failure. However, each condition seems reasonable. But the real question of course is what China is willing to agree upon. Mr Xie did not say anything about that. From a diplomatic point of view that is probably wise. We will see what kind of results will pan out of this conference. 

Follow the conference live, here.

Green Innovation Should Be Patent Free Zone?

Since the environment is such a big problem, should not green technology be free of patents to that technology transfer and absorption goes fastest. I have not read any studies on this particular topic, but it probably will hold back investments of some companies in new green innovation. Patents can stifle innovation when licenses are too expensive (and then there are compulsory licenses, which have never been used in China, yet), but they can also be an incentive for other companies to invent around it, so that newer and sometimes better technology will be invented.

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Research on Equipment Manufacturing Industry China: IPR Significant Impact on Transition From Imitative To Independent Innovation

The Journal of Technology Management in China (Vol. 6 No. 3, 2011, p 257-266) has an interesting article  A study of the evolutionary path of technological innovation modes in the equipment manufacturing
industry of China written by Yuan Yi-jun and Lv Cui-jie (Department of Economics, Dalian University of Technology). 


Yuan and Lv use evolutionary game theory to research what hinders the transition from imitative innovation to independent innovation in the strategically important equipment manufacturing industry. 

The authors come to the conclusion that the obstacle factors from imitative to independent innovation are internal and external mutation conditions:

• Internal: path dependence and lack of benefit incentives;
• External: lack of fiscal support and lack of intellectual property protection

Yuan and Lv: "The results show that the pursuit of the benefit (innovation return or above-average profits), as an internal mutation condition, is the most fundamental motivation for independent innovation, while policy incentives, as the external mutation conditions, have a significant impact on the evolutionary transition from imitative innovation to independent innovation in equipment manufacturing enterprises."

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Technology Transfer to China: Judgment Day Is Coming For US and European Car Industry

"Last Judgment"
as envisioned by Stefan Lochner in the car free year of 1435

The European and American automotive industry should wake up. Reuters quoted Sergio Marchionne, CEO of Chrysler Group LLC and Fiat SpA saying: "The excuse that we did not understand or that we underestimated the scale will serve no purpose. Rather we need to continue to work to make our industrial base more competitive, because the day of reckoning is inevitably coming."

He is referring to the partnerships between European and US car companies with Chinese companies that have transferred crucial technology to China. This is going to boomerang when the Chinese cars (built with European and US IPRs) will start to invade European and US markets in significant numbers.

Read the Reuters article here.

But wait. According to Nathan Myhrvold and Edward Jung, respectively CEO and CTO of Intellectual Ventures, non-Chinese companies might get a smaller part of the pie, but the pie will be growing. Read their Wall Street Journal article here.

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Part I: Lessons Learned from Technology Transfer and Essential IP in China/HK

June 16th, the European Chamber of Commerce in Hong Kong (ECCHK) organised together with the European Union Business Information Programme of Hong Kong and Macao the 3rd annual China IPR SME Helpdesk seminar, this time about 'Technology Transfer and Essential IP Strategies for EU SMEs in Mainland China and Hong Kong'. 

For all companies that are involved in adding or acquiring technology to and from China and want to remit the Renminbis earned, this seminar could not have come more timely.

Veronica Llorca, Project Director-European Union Business Information Programme

Photo: Danny Friedmann

Veronica Llorca (ECCHK) gave the kickoff of the event followed by Peter Cremers, chairman of ECCHK, who in his introductory words illustrated the importance of technology transfer and IP. Mr Cremers stressed that public awareness of IP is the guarantee for companies' long term success.

Peter Cremers, Chairman ECCHK
Photo: Danny Friedmann

Maria Castillo, Head of Office, EU Delegation to Hong Kong & Macau concisely described the high costs of IP infringements for EU industry. 

Maria Castillo, Head of Office, EU Delegation to Hong Kong and Macao
Photo: Danny Friedmann

Then Catherine Sun, managing director of China Intellectual Property Limited in Shanghai gave a presentation about the 'practical considerations for European companies engaging in technology transfer. Ms Sun gave an overview of the legal framework. 

Catherine Sun, Managing Director, China Intellectual Property Limited
Photo: Danny Friedmann

• Regulations on Administration of Technology Import and Export adopted by the State Council on October 31, 2001, promulgated on December 10, 2001, effective since January 1, 2002; 
• Catalogue of Technology of Which China Prohibits or Restricts the Import (First Batch) promulgated by MOFTEC and SETC on December 30, 2001, into force on January 1, 2002, but repealed on November 23, 2007, with the implementation of Catalogue of Technology Which China Prohibits or Restricts the Import, promulgated by MOFTEC on Decmber 12, 2001, in force on January 1, 2002, revised on November 1, 2008;
• Catalogue for Guidance on Foreign Investment in Industries issued by the State Development Planning Commission, SETC, MOFTEC on March 11, 2002, into force on April 1, 2002;
• Regulations on Guiding the Direction of Foreign Investment promulgated by the State Council on February 11, 2002, into force April 1, 2002; 
• Notice on How to Adjudicate Disputes on Technology Contracts by Intellectual Property Courts issued by the Supreme People's Court on June 19, 2001; 
• The Supplemental Notice Concerning Strengthening Administration for Technology Imnport Contracts and the Sale and Payment of Foreign Exchange issued by MOFTEC and SAFE on March 19, 2001; 
• Catalogue for Technology and Products that are Encouraged for Import, issued by National Development and Reform Commission, MOFCOM and Ministry of Finance on July 22, 2009. 

For dispute resolution Ms Sun made clear that Hong Kong and Singapore are preferred locations for arbitration, and considered politically acceptable by China. She also touched upon articles 24 and 25 Technology Import & Export Regulations 2002 that the technology to be transferred is “complete, error-free, valid, and capable of accomplishing contracted technical objectives.”

This is not because China does not want later improvements, but it means that China wants that the innovator is acknowledged: article 27 Technology Import & Export Regulations 2002 provides that during the validity of the contract, ownership of improvements in technology shall be vested in the improving party. Foreign transferors are advised to limit the geographical area of use of the licensed technology and its improvements, and to negotiate for a nonexclusive license and an exclusive license outside China for use of the improved technology.

Article 26 Technology Import & Export Regulations 2002 require assignees and transferees to keep trade secrets and know-how received from assignors and licensors confidential during the validity of the technology contract.

Although confidentiality is required by government employees responsible for approving and registering technology import and export contracts when they received trade secrets and know-how from transferors and/or transferees, irregularities can happen.

Ms Sun has written extensively about the topic and also about trade secrets.

Part II you can find here.

Part III you can find here.

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Joint-venture with technology transfer no panacea for market access to China's aviation industry

China's 12th Five-Year Plan (2011-2015) states that the general aviation industry's development will be
promoted, reform the airspace management system as well as increase the efficiency of the allocation and utilization of airspace resources. Bright sky for China's aviation industry. But what about foreign aviation companies, will they be able to takeoff or will they stay grounded.

Like all governments the Chinese government is giving its national aircraft corporation, the Commercial Aircraft Corporation of China, Ltd. (COMAC), support. The government made it obligatory for foreign aviation companies that want to supply to China to partner with COMAC and establish joint-ventures to get technology transfer via the ARJ21 and C919 projects. No company, including Western companies wants to give its intellectual property away without compensation. Therefore those Western companies that agreed to the terms of technology transfer for the C919 did so with old versions of their technology.

飞机

Cliff, Ohlandt and Yang write in their report 'Ready for Takeoff' sponsored by the U.S.-China Economic and Security Review (USCC) that joint ventures per se do not guarantee effective market access, but that the inverse, “those that do not provide access to coveted technologies or—even more problematically—are perceived to compete against domestic producers are not likely to receive preferential treatment and may indeed face severe obstacles.”

Read Roger Cliff, Chad J.R. Ohlandt, David Yang, Ready for Takeoff, China's Advancing Aerospace
Industry RAND National Security Research Division, sponsored by the U.S.-China Economic and
Security Review Commission, 2011, available here.

Wonderful characters 飞 fei 机 ji mean literally "bird machine" = airplane

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Knowledge Transfer in China: How To Train The Dragon To Consume You

Professor Pierre Sauvé, deputy managing director, director of studies and faculty member at the World Trade Institute (WTI), Switzerland gave a very interesting guest research lecture at CUHK November 24, 2010: "Waiting for Godot? The troubled prospects of (coherent) multilateralism in investment rule making". Inspired by his speech in which he mentioned the requirement of many countries to use a certain percentage domestically produced parts in the product to prevent that tariffs are imposed that make the product uncompetitive (for example there is a domestic content requirement in the U.S. car industry of 75 percent. Therefore Japanese automobile plants opened in the U.S.), IP Dragon has been thinking about knowledge transfer in China.

Also on November 24, Leslie Hook wrote on the front page of the Financial Times an article called 'Westinghouse gives China details of nuclear reactor technology':

"Westinghouse Electric has handed over more than 75,000 documents to its Chinese customers as the initial part of a technology transfer that it hopes will secure the company's place in the world's fastest-growing nuclear market."

Whether this hope can become a reality remains to be seen. There are ample examples of companies that transferred their technology in the hope of selling more products in the future, only to find out that their customer metamorphosed into formidable competitors.

Speed railway system: Alstom (France), Siemens Mobility (Germany), Kawasaki Heavy Industries Ltd. (Japan) shared high-speed rail technology with China's CSR Corporation Ltd, and China CNR Corporation Ltd.

Thomas Hout and Pankaj Ghemawat wrote the article 'China vs the World: Whose Technology Is It?' in the Harvard Business Review of December 2010. In this article they give an overview of China's plans, which they formulated in 2006, to close the technology gap with the west.

"China wants to strengthen innovation, particularly in energy, transportation, the environment, agriculture, information and health." Professors Hout and Ghemawat write that China wants to increase their proprietary IP. In order to prevent that Chinese companies have to pay royalties for foreign IP, China is promoting its own unique national technology standards, that form de facto entry barriers to foreign manufacturers: WAPI (Wireless local area network Authentication and Privacy Infrastructure) and TD-SCDMA (Time Division Synchronous Code Division Multiple Access).

Because China has many state-owned enterprises, it can orchestrate mergers and acquisitions in industries that are considered of key importance to China. Professors Hout and Ghemawat give four mechanisms that China is using to support their industries:

1. Tax incentives for key industries;

2. Spending and soft loans for key industries;

3. Procurement that favours indigenously developed technologies (China is an observer to the WTO General Procurement Agreement and not a member);

4. Forcing multinational companies to transfer their newest technologies to their joint ventures with state-owned companies.

The following companies are among those that will probably thrive under these circumstances:

Aviation: Aviation Corporation of China (AVIC)

Wind energy: Sinovel, Goldwind

Enterprise Resource Planning (ERP) software: Kingdee International Software Group

Solar energy: Suntech, Yingli Solar, JA Solar

How to train the dragon ... to become your competitor?

Why would a company transfer their technology, which is their only advantage in comparison to Chinese companies that can produce much cheaper? Are these foreign companies suicidal?

Some are lured by the prospect of great deals in the long run, and expect loyalty from Chinese companies and China. However, this might never materialise. Instead it is very possible that after the technology transfer has been completed the joint venture will be dissolved so that the Chinese part will leapfrog and become a formidable competitor of the foreign company.

Some foreign companies might be more realistic. They might have the conviction that if they don't do it, some other foreign company is cooperating with the Chinese and securing in the short term big orders. Because of the prisoner's dilemma they might be right. China does not have this problem. The foreign company has probably the idea that the revenues from the Chinese orders can be reinvested into new technology, so that the technological edge can be sustained. Nevertheless, it seems a risky strategy.

UPDATE November 29, 2010:

Francois de Beaupuy and Tara Patel wrote: 'China Builds Nuclear Reactor for 40% Less Than Cost in France, Areva Says', November 25, 2010.

Nuclear Townhall reports in the article 'China, Russia Leveraging Nuclear Energy For World Economic Lead', November 26, 2010: "Chinese technicians have already reversed-engineered Areva 900-MW reactors built at Daya Bay into the CPR-1000 and have 16 under construction, the first scheduled to open next September. Zhang [Shanjing, president of China’s Guangdong Nuclear Power Corporation] said that once certain intellectual property issues are cleared up with Areva, Guangdong would begin exporting, probably by 2013."

Read also IP Dragon's 2006 article Intellectual Property Rights of German Train Gone With The Wind.

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US-China Green Technology Transfer Strained By Circular Reasoning

Last month (October 22nd 2009) The Economist had a special report about the relationship between China and the US. In the article 'The price of cleanliness' the circular reasoning is pointed out that makes solving the environmental challenge in China very difficult:

"Technology transfer will also be a thorny issue. China resents the idea of American clean-energy companies taking advantage of China’s predicament to profit from their expertise. But American companies will not be keen to hand over advanced technologies without adequate protection for their intellectual-property rights. China’s lack of attention to this area is bitterly resented by many American businesses, not just high-tech ones."

Read James Miles' article for The Economist article here.

In other words: China lacks trust that US will transfer their patented green technology; US lacks trust China is protecting US green IPRs; etc.; etc. Wood absorbs water; water rusts metal; metal breaks up earth; earth smothers fire; fire burns wood; etc.; etc.

UPDATE:
China also wants Japan to transfer its patented green technology. Kyodo News International reports via iStockAnalyst, read here: "[Chinese Vice Premier] Li [Keqiang] requested that Japan accelerate the transfer and promotion of environment-related technology to China, while promising that China will ensure that the intellectual property rights of Japanese companies are protected. Japan and China are scheduled to hold a first working-level meeting on intellectual property rights in Tokyo on Nov. 19."

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Technology Transfers: After the Maglev China Got An Appetite For the Shinkansen Bullet Train

Remember Germany's consortium Transrapid International who designed and built the Maglev trains in China? See Intellectual Property of German Train Gone with the Wind. China 'digested' the technology pretty fast to come up with its own version of this train.

The same technology transfer is happening with the Japanese Shinkansen bullet train. Read an article about it of Murie Dickie for the Financial Times Germany, here.

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